Tamiu course descriptions

Answer the Module 3 Problem Set questions using the Excel spreadsheet provided.

Remember that when you use the perpetuity formula, the formula automatically presents values for the perpetuity one period, so if you use the perpetuity formula in year 7, the result is as of the beginning of year 7 and not the end.

MCM Inc. Sales growth Costs (% of sales): Cost of Goods Sold Advert., Prom., & Selling General & Administrative Rates: Tax rate Discount rate Results PV of NCF (incl. TV) + Cash - Debt Total Equity (M$) - # of shares outstanding (M) - Price/share ($) Yrs. 1-6 6% 55% 20% 6% 20% 8% 3.0 6.0 22.0 7+ 3.0% Cash F Sales Cost of Goods Sold Advert., Prom., & Selling General & Administrative Net Income before Tax Taxes Net Income after Tax Cash flow adjustments: Working Capital Capital Expenditures Net Cash Flows 1 102.0 2 (4.0) (3.3) (4.0) (3.2) Cash Flows 3 (3.5) (3.3) 4 5 6 (3.0) (3.4) (3.0) (4.0) (1.5) (2.0) TV JTM Airlines Rates: Discount rate Risk-free rate 1 2 3 4 5 Scenario: No Real Options 6 7 8 5 Scenario: Real Options 6 7 8 Cash from Operations minus: Capital Expenditures = Net Cash Flow Terminal Value PV of NCF 1 Cash from Operations minus: Capital Expenditures = Net Cash Flow Terminal Value PV of NCF PV of Cap. Ex. (Yrs. 1-2) 2 3 4 o: No Real Options 9 10 11 12 13 14 15 rio: Real Options 9 10 11 12 13 14 15 Option Pricing: PV of Cap. Ex. (Yrs. 1-2) Maturity PV of NCF Risk free rate Volatility BS calculations: d1 N(d1) d2 N(d2) Price of call Difference: - Value of Option over PV - % of PV on over PV #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! JTM Airlines Airport Expansion Start Phase I Phase II Phase III Success 60% PV of Revenues 250 25 East Coast 20% 75 Failure 40% 15 Success 75% 30 185 West Coast 20% 55 Failure 25% Success 60% 35 Success 80% 20 400 20 Caribbean 30% 80 Start Failure 20% 25 Failure 30% Failure 40% 5 - 20 - 20 Costs Net Probability Expected Value MGMT 332 Corporate Finance I Module 3: Risk Analysis, Real Options, and Capital Budgeting Problem Set 3 – Risk Analysis, Real Options, and Capital Budgeting 1. Company Valuation Your manager has asked you to value MCM Inc., a potential acquisition. To make your life easier, your manager gave you some of the numbers in the Excel template file provided. Your manager wants the dollar price per share, so you must calculate the dollar value of the equity and then divide by the number of shares outstanding. 2. Real Options a. JTM Airlines, where you work, is looking at potentially buying more gates at their home airport. If it pays the airport $1M, JTM will hold exclusive rights to buy those gates for $9M (at the start) and $9M (one year later) at any time in the next 3 years. The option expires at the end of year 3. JTM's discount rate is 6.5% and the risk free rate is 3%. What is the NPV of the gate purchases if it bought them today? Use the data in the Excel template provided. b. After you run the numbers for part A, you remember back to your ERAU corporate finance class's coverage of real options. You know that the 3-year option has value, so you decide to calculate it by: 1. Present valuing the purchase price of the gates separately using the riskfree rate. Once JTM decides to go ahead with the purchase, there is no risk to that expenditure. 2. Present valuing the Net Cash Flow excluding those purchase prices. This calculation will include Cap. Ex.